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Paul Krugman: The austerity delusion

86 points by jhnpckr 11y ago

jpfr 11y ago
What about Japan? They tried to buy economic growth (dubbed Abenomics) and failed horribly. The economy is worse and government debt is higher than ever. Models that can't explain some weird edge cases are ok. But what happened in Japan is the exact opposite of what Mr. Krugman tries to convince people.
- forgottenpass 11y ago
  You might have better luck answering your question by googling "krugman japan" than asking outloud on social media. I know he's talked about his take on Japan a fair bit over the years and I generally ignore economist blogs in the first place.
- Amezarak 11y ago
  Krugman has written a lot about Japan, and Abenomics. According to Krugman's own analysis, Abenomics would not be very effectual and warned that particular Abenomics policies (like the tax increases) would indeed worsen the economy. It's a little disingenuous to say the economy is worse: growth did improve (until the VAT increase Krugman warned would be disastrous) and unemployment did fall, and Krugman wasn't worried about the debt in the first place since the Japanese can still borrow at very low rates. Abenomics does not correspond almost at all to Krugman's prescriptions, it was simply expected to be slightly less bad than what was happening before.
  - adventured 11y ago
    To get that growth, Japan massively debased the Yen, chopping down the Japanese standard of living and reduced the real value of all of that debt Japanese citizens are expecting to be paid back by the government. If you have to significantly harm your currency to get growth, what you're getting is not actual growth, merely an illusion.
    - Amezarak 11y ago
      In what sense do you mean Japan has "debased" the yen? Inflation has been virtually nonexistent. A weaker yen promotes exports; obviously not something that is automatically bad for the economy. It's absolutely not true that having a weaker currency means growth is illusory.
      - adventured 11y ago
        If you reduce the value of your currency by 25%, and get 3% GDP growth in the process, you have to adjust the baseline lower and what you've actually got is a drastic reduction in real economic value. The Japanese government has been aggressively devaluing the Yen, because they're bankrupt and can no longer afford to pay even the interest on their debt without either using printing or new debt issuance. They're stuck in a downward spiral. Japanese savings have collapsed to zero, so the Japanese people can no longer afford to fund continued government debt expansion as they were before. That has left the Japanese government with no other options but currency debasement, ie devaluing the real worth of outstanding Yen based debt (which is mostly held by Japanese citizens, which is then ultimately a slashing of their wealth). Japan has suffered zero deflation over the last 25 years. That's why Japan is one of the most expensive places on earth to live in most every respect. If they had suffered 25 years of deflation, their prices would have gone down accordingly. Their long-term price index shows zero deflation. http://i.imgur.com/Cvwj26A.png http://i.imgur.com/Cvwj26A.png The notion they've been stuck in deflation is keynesian economists confusing what deflation is. Under keynesian economics, if a bubble is inflated, and then bursts, taking down real estate prices, they call those falling prices deflation - when in fact it is not. This is one of the many obvious flaws at the heart of keynesian economics, which has helped lead the globe into its current perpetual stimulus addiction path.
        mdemare 11y ago
        > If you reduce the value of your currency by 25% It is the dollar that has appreciated, not the yen that has depreciated. The dollar has appreciated against most currencies in the last year – probably because people expect interest rate hikes this year. It has nothing to do with Japan per se.
- mdemare 11y ago
  Japan's economy is growing, albeit slowly.
pluckytree 11y ago
If all you care about is the short-term, then forget about austerity. Juice things up a bit. Throw some borrowed money at it. Alleviate some economic misery. But long-term, living within your means leads to greater stability, a market where prices reflect reality, and people that save are rewarded. This is a far greater payoff in exchange for some potential short-term pain. The worst part is that many governments claiming “austerity” are just playing accounting tricks and not really moving towards solvency. The solution for having spent too much and distoring the economy is not to continue to do the same. We’ll never know who is right, though. Most of the world has been following the recommendations of this “economist” for decades. Maybe only indirectly because I’m not sure how many people pay attention to him. Spending massively is popular with the public because they get all the benefits, but will be 6 feet under when the bill comes due. Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea. This guy is the same type of person that thinks that companies carrying a lot of debt is a good idea. The sign of a healthy business. Bunk.
- jhugg 11y ago
  The proper time for austerity is when things are good. When things are bad, juice it up, especially if you can borrow at rates that are negative when inflation adjusted. The problem with austerity now to make the long term better is that it's not a zero sum game. Austerity lowers GDP growth, which can offset any move toward solvency. You spend less and surprise, you also take in less. Eventually you recover, but poorer than if you had juiced things a bit and no less in debt.
  - dageshi 11y ago
    Had the government in the UK run a surplus prior to the financial crisis I suspect the case for a larger Keynesian response from the UK public would have been better received. That is afterall what Keynes originally proposed. Modern Keynesians have disproved it's necessity and yet... public opinion ultimately drives policy, perhaps Keynes requirement of running a surplus in the good times in order to run a deficit in the bad was more about satisfying the psychology of the general public than anything else.
jstalin 11y ago
I'm sure the Greeks would be delighted to hear that more debt spending is the shot in the arm they've been looking for.
- mpweiher 11y ago
  Well, Greece has done austerity. And now their debt is higher than before. You don't do austerity in the middle of a depression.
- cjensen 11y ago
  He specifically calls out Greece as a special case. His comments are directed towards economies which are not like Greece.
  - pjkundert 11y ago
    Ah. The trusty "No True Scottsman" fallacy...
    - Amezarak 11y ago
      No, it's not a "No True Scotsman" fallacy. Greece, crucially, does not print its own currency and there was no real lender of last resort available at the time. It's been a trivial exercise for many years to point out that countries with even more debt than Greece are not going into debt crises for those exact reasons, with Japan as the almost canonical example with its still-low interest rates.
Alleluja 11y ago
Krugman: an idiot who recommended inflating housing bubble to the FED publicly back in 2003
elchief 11y ago
Looks like BoE Governor Carney is anti-austerity. I wonder how his meetings with Mr. Cameron go. http://www.theguardian.com/business/2015/jan/28/bank-england-governor-attacks-eurozone-austerity http://www.theguardian.com/business/2015/jan/28/bank-england...
nawitus 11y ago
Related article: "A jobs miracle is happening in Britain, thanks to tax cuts. Why don't the Tories say so?" http://www.spectator.co.uk/features/9475222/the-coalitions-jobs-record-is-miraculous-why-wont-they-talk-about-it/ http://www.spectator.co.uk/features/9475222/the-coalitions-j...
- youngtaff 11y ago
  Unfortunately that article doesn't really explore how much these people who are part of the jobs miracle are being paid!
nostromo 11y ago
Interest rates are 0% and our economy isn't growing (Q1 '15). I find that scary. I'm seeing the results of Krugman's philosophy on the ground: Asset prices are way up. Housing in my city is almost as expensive as it was before the '08 crash. For those of us that are lucky enough to own stocks and a house -- three cheers for Krugman, 0% interest rates, and QE! But the asset economy is outpacing the real economy. Wages are not up. Working age labor force participation is down. Q1 GDP was flat. If you're a working person in the U.S. right now, you're not thriving. And to me this is a sign that Keynesianism is perhaps played out. We're increasing asset prices, making housing more expensive and increasing inequality, without actually growing the economy.
- adventured 11y ago
  The 40 to 50 year global experiment in Keynesianism has been a complete disaster. The greater extent a country has put it to work, the bigger the disaster. All it has done, is give governments an excuse to drastically spend beyond their means to fake growth and well being that isn't real. Then they act so shocked when their economies sink into recession the moment the stimulus programs stop. The US, Europe, China, Japan are all drowning in this fraud, with $60-$80 trillion in new debt over the Keynesian reign, and absolutely nothing to show for it but economic strangulation and upset voters.
- douglasisshiny 11y ago
  Q1 '15 is being considered a blip for many reasons (weather, west coast port strike, the strong dollar [1], big hits in the energy markets and markets affected by energy, etc.). Many economists expect a bounce back, much like last year. 1. Remember when people, counter to what Krugman said, said the dollar was going to experience hyperinflation?
deleted 11y ago
[deleted]
- mudil 11y ago
  Former Enron adviser Paul Krugman.
anm89 11y ago
Paul Krugman in 2002: "To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Somehow every op-ed this guy writes gets treated as the word of god. It is important to remember that while he does have a Nobel prize, he has also said a lot of profoundly dumb stuff. I am not saying that Austerity is inherently good or inherently bad. The truth, like for everything else, lies in the grey and is situation dependent. Krugman however is absolutely religious about fiscal stimulus and demand side economics, and is going to claim that the solution to EVERY problem is increased government spending. These situations are nuanced and unfortunately what you are hearing from Krugman is something more akin to proselytizing his religous views on the graces of Government spending(a view which no facts or events would every sway him from) opposed to thinking critically about a difficult problem.
- mudil 11y ago
  Not god. Just former Enron adviser Paul Krugman.
  - MaysonL 11y ago
    So what? See: http://www.pkarchive.org/personal/EnronFAQ.html http://www.pkarchive.org/personal/EnronFAQ.html
- Amezarak 11y ago
  Let's see what Krugman says about this: > One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece. > Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened. http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/comment-page-5/?_r=0 http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the... Aside from that, Krugman does not, in fact, prescribe increasing the government's share of economic growth in all circumstances, so you're wrong anyway.
trhway 11y ago
the main problem with "austerity" isn't the theoretical question of the spending levels, it is the political&social issue that practical "austerity" means that during bad times poor people must pay for the well connected and rich people's exuberance of the good times. "Sorry, we have to reduce your pensions and salaries to pay back the loans we spent on our luxury BMWs."
jhulla 11y ago
What Krugman and his ilk fail to address is capital misallocation. Placing capital into its most productive use is the definition of a well functioning market. We tolerate market distortion for greater social good: safety regulations, environmental regulation, labor laws, etc. Unfortunately, with QE1,2,twist,3 and ZIRP, we are now well past properly functioning capital markets. At a gross scale, every single investment in the world now is actually a bet on central bankers keeping interest rates suppressed, liquidity flowing, and money printers running. The trillions of dollars of distortion that capital markets have experienced since 2008 has fundamentally altered the investment landscape. And not for the better. Krugman crowing about austerity is laughable. Of course, government spending is just another form of capital distortion. Sure, try some more. It'll be another drop in the bucket. It will not move the needle in a sustainable fashion. Global demand is being vacuumed up by economies through competitive currency devaluation. Deficit spending (Krugman's argument) generates new demand in the hopes of creating jobs and nurturing the economy. Unfortunately, since 2008, our global financial system is so radically distorted that a burst of demand isn't about to lift anybody out of long-term economic doldrums. At the root of the problem is massive capital misallocation that has been baked in the cake. Global supply is so large due to QE and ZIRP that economies worldwide cannot support their investments. Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. Krugman doesn't get it.
- Amezarak 11y ago
  > Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. So while Krugman offers data and concrete, falsifiable predictions that generally prove correct - for example, that hyperinflation will not be a problem, that QE won't move the economic needle much (but is better than nothing), that interest rates will remain low for the foreseeable future despite claims to the contrary, you offer vague handwaving about capital misallocation and "distortions" and then tell us you can't answer how and when Krugman will actually be wrong. Can you understand why people have difficulty coming to terms with your beliefs? To me it just seems rooted in some cognitive bias about suffering and sacrifice; it sounds like you just can't believe things are this easy, that we have to suffer and be punished for our vile profligacy.
mudil 11y ago
The big Keynesian idea is that somehow gov't can allocate capital better than private businesses. But that patently cannot be true. (I never could understand how Keynesian economics is different from socialism.)
- Mikeb85 11y ago
  Not true whatsoever. Here's the definition as stated by Wikipedia, which I find to be pretty accurate and concise: > Keynesian economics is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). This contrasts with the earlier theory that production creates demand. And while Keynesian economics does suggest that the government should intervene in the economy, it's far from a command economy.
bitL 11y ago
The problem with austerity as I see it is that it is a losing strategy if any other player doesn't adhere to it. Example - Economy A starts QE, Economy B sticks to austerity. Economy A gets super cheap money they have to invest somewhere, Economy B is short on money due to austerity. Economy A with the money out of thin air buys most of the industrial assets of Economy B. Economy B wants to change the course by rejecting austerity and starting QE. But the first mover advantage is gone, Economy A's stocks are already inflated so Economy B can't gain anything by trying to do the same as Economy A, buying Economy A's industrial assets, causing downfall of its trading currency.
pbreit 11y ago
Pretty much every government could benefit immensely from austerity. The problem is, of course, that government is lousy at execution and overly political and self-preservation all and so, for example, cuts the most visible programs first. Yes, I understand the notion of spending your way out of a recession.
seertaak 11y ago
The Paul Krugman delusion: thinking a little or a lot more of the policies that have produced little to no improvement will suddenly work if we do it just one more time.
- mdemare 11y ago
  Actually, The Paul Krugman delusion is the illusion that people have that they have much more insight in economics and economic policy than Paul Krugman, despite never having studied economics, or read a textbook or a journal in economics.
  - quadrangle 11y ago
    That's really just an instance of the Dunning-Kruger effect, but it's a good example of it.
  - brucefancher 11y ago
    Paul Krugman is not correct or incorrect to the extent that he has studied economics and economic policy. He's correct or incorrect to the extent that he can back up his views with evidence, which he generally can't.
thoward 11y ago
Krugman presents this as a dilemma between two choices. 1. Institute austerity now. 2. Institute stimulus now, pay down debt responsibly once the good times roll. This is a sham dilemma. The real options appear to be. 1. Institute austerity now. 2. Institute stimulus now, but half-ass the debt paydown in the future, condemning future generations to a high debt to GDP ratio. Given this real dilemma, which is worse? I don't pretend to know the answer. I know austerity sucks. I also know that governments lack the self discipline to pay down debt significantly in the future. Which option is actually worse?
- Amezarak 11y ago
  > Given this real dilemma, which is worse? I don't pretend to know the answer. I know austerity sucks. I also know that governments lack the self discipline to pay down debt significantly in the future. What real-world problems do high debt/GDP ratios cause? Isn't the whole point of stimulus to kick-start the denominator in the debt/GDP equation? At any rate, governments don't need to "pay down debt" (which is kind of a strange thing to say, since the government is always paying off bonds.) They just need to grow the economy such that the debt is less substantial, which pretty much everyone has always done. I mean, the US wasn't going through times of tribulation paying off its 100%+/GDP debt after WWII, we just inflated it away.
  - thoward 11y ago
    Here's an interesting meta-study about the effects of a high debt to gdp ratio. http://www.nber.org/papers/w16827 http://www.nber.org/papers/w16827 I admire the candor of your second point ("we just inflated it away.") I think this is ultimately what will happen here in the USA. I think that most people would choose austerity now over higher inflation down the road, but maybe I'm delusional. Our consumer savings rates continue to trend down so maybe people just wouldn't care much. http://www.tradingeconomics.com/united-states/personal-savings http://www.tradingeconomics.com/united-states/personal-savin...
    - Amezarak 11y ago
      > Here's an interesting meta-study about the effects of a high debt to gdp ratio. I know you're sincere, but I kind of had to laugh. Reinhart and Rogoff have been through the ringer for publishing that paper, which is almost entirely bunk. There was a huge storm that made it even to the mainstream media about how truly flawed that paper was (with errors getting as basic as "they can't use Excel.") It's even mentioned in the OP. To be fair, the claim that slower economic growth is correlated with high debt is somewhat true. But most argue causation is in the other direction: slow growth causes high debt. > I admire the candor of your second point ("we just inflated it away.") You might recall that the time period in which we inflated that debt away was one of the most prosperous for all Americans. Meanwhile, austerity will directly lead to people losing their jobs and an economic slowdown that will prolong the suffering people are already going through...for what?

86 points by jhnpckr 11y ago

jpfr 11y ago

What about Japan? They tried to buy economic growth (dubbed Abenomics) and failed horribly. The economy is worse and government debt is higher than ever. Models that can't explain some weird edge cases are ok. But what happened in Japan is the exact opposite of what Mr. Krugman tries to convince people.

forgottenpass 11y ago
You might have better luck answering your question by googling "krugman japan" than asking outloud on social media. I know he's talked about his take on Japan a fair bit over the years and I generally ignore economist blogs in the first place.
Amezarak 11y ago
Krugman has written a lot about Japan, and Abenomics. According to Krugman's own analysis, Abenomics would not be very effectual and warned that particular Abenomics policies (like the tax increases) would indeed worsen the economy. It's a little disingenuous to say the economy is worse: growth did improve (until the VAT increase Krugman warned would be disastrous) and unemployment did fall, and Krugman wasn't worried about the debt in the first place since the Japanese can still borrow at very low rates. Abenomics does not correspond almost at all to Krugman's prescriptions, it was simply expected to be slightly less bad than what was happening before.
- adventured 11y ago
  To get that growth, Japan massively debased the Yen, chopping down the Japanese standard of living and reduced the real value of all of that debt Japanese citizens are expecting to be paid back by the government. If you have to significantly harm your currency to get growth, what you're getting is not actual growth, merely an illusion.
  - Amezarak 11y ago
    In what sense do you mean Japan has "debased" the yen? Inflation has been virtually nonexistent. A weaker yen promotes exports; obviously not something that is automatically bad for the economy. It's absolutely not true that having a weaker currency means growth is illusory.
    - adventured 11y ago
      If you reduce the value of your currency by 25%, and get 3% GDP growth in the process, you have to adjust the baseline lower and what you've actually got is a drastic reduction in real economic value. The Japanese government has been aggressively devaluing the Yen, because they're bankrupt and can no longer afford to pay even the interest on their debt without either using printing or new debt issuance. They're stuck in a downward spiral. Japanese savings have collapsed to zero, so the Japanese people can no longer afford to fund continued government debt expansion as they were before. That has left the Japanese government with no other options but currency debasement, ie devaluing the real worth of outstanding Yen based debt (which is mostly held by Japanese citizens, which is then ultimately a slashing of their wealth). Japan has suffered zero deflation over the last 25 years. That's why Japan is one of the most expensive places on earth to live in most every respect. If they had suffered 25 years of deflation, their prices would have gone down accordingly. Their long-term price index shows zero deflation. http://i.imgur.com/Cvwj26A.png http://i.imgur.com/Cvwj26A.png The notion they've been stuck in deflation is keynesian economists confusing what deflation is. Under keynesian economics, if a bubble is inflated, and then bursts, taking down real estate prices, they call those falling prices deflation - when in fact it is not. This is one of the many obvious flaws at the heart of keynesian economics, which has helped lead the globe into its current perpetual stimulus addiction path.
      - mdemare 11y ago
        > If you reduce the value of your currency by 25% It is the dollar that has appreciated, not the yen that has depreciated. The dollar has appreciated against most currencies in the last year – probably because people expect interest rate hikes this year. It has nothing to do with Japan per se.
mdemare 11y ago
Japan's economy is growing, albeit slowly.

pluckytree 11y ago

If all you care about is the short-term, then forget about austerity. Juice things up a bit. Throw some borrowed money at it. Alleviate some economic misery. But long-term, living within your means leads to greater stability, a market where prices reflect reality, and people that save are rewarded. This is a far greater payoff in exchange for some potential short-term pain. The worst part is that many governments claiming “austerity” are just playing accounting tricks and not really moving towards solvency. The solution for having spent too much and distoring the economy is not to continue to do the same. We’ll never know who is right, though. Most of the world has been following the recommendations of this “economist” for decades. Maybe only indirectly because I’m not sure how many people pay attention to him. Spending massively is popular with the public because they get all the benefits, but will be 6 feet under when the bill comes due. Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea. This guy is the same type of person that thinks that companies carrying a lot of debt is a good idea. The sign of a healthy business. Bunk.

jhugg 11y ago
The proper time for austerity is when things are good. When things are bad, juice it up, especially if you can borrow at rates that are negative when inflation adjusted. The problem with austerity now to make the long term better is that it's not a zero sum game. Austerity lowers GDP growth, which can offset any move toward solvency. You spend less and surprise, you also take in less. Eventually you recover, but poorer than if you had juiced things a bit and no less in debt.
- dageshi 11y ago
  Had the government in the UK run a surplus prior to the financial crisis I suspect the case for a larger Keynesian response from the UK public would have been better received. That is afterall what Keynes originally proposed. Modern Keynesians have disproved it's necessity and yet... public opinion ultimately drives policy, perhaps Keynes requirement of running a surplus in the good times in order to run a deficit in the bad was more about satisfying the psychology of the general public than anything else.

jstalin 11y ago

I'm sure the Greeks would be delighted to hear that more debt spending is the shot in the arm they've been looking for.

mpweiher 11y ago
Well, Greece has done austerity. And now their debt is higher than before. You don't do austerity in the middle of a depression.
cjensen 11y ago
He specifically calls out Greece as a special case. His comments are directed towards economies which are not like Greece.
- pjkundert 11y ago
  Ah. The trusty "No True Scottsman" fallacy...
  - Amezarak 11y ago
    No, it's not a "No True Scotsman" fallacy. Greece, crucially, does not print its own currency and there was no real lender of last resort available at the time. It's been a trivial exercise for many years to point out that countries with even more debt than Greece are not going into debt crises for those exact reasons, with Japan as the almost canonical example with its still-low interest rates.

Alleluja 11y ago

Krugman: an idiot who recommended inflating housing bubble to the FED publicly back in 2003

elchief 11y ago

Looks like BoE Governor Carney is anti-austerity. I wonder how his meetings with Mr. Cameron go. http://www.theguardian.com/business/2015/jan/28/bank-england-governor-attacks-eurozone-austerity http://www.theguardian.com/business/2015/jan/28/bank-england...

nawitus 11y ago

Related article: "A jobs miracle is happening in Britain, thanks to tax cuts. Why don't the Tories say so?" http://www.spectator.co.uk/features/9475222/the-coalitions-jobs-record-is-miraculous-why-wont-they-talk-about-it/ http://www.spectator.co.uk/features/9475222/the-coalitions-j...

youngtaff 11y ago
Unfortunately that article doesn't really explore how much these people who are part of the jobs miracle are being paid!

nostromo 11y ago

Interest rates are 0% and our economy isn't growing (Q1 '15). I find that scary. I'm seeing the results of Krugman's philosophy on the ground: Asset prices are way up. Housing in my city is almost as expensive as it was before the '08 crash. For those of us that are lucky enough to own stocks and a house -- three cheers for Krugman, 0% interest rates, and QE! But the asset economy is outpacing the real economy. Wages are not up. Working age labor force participation is down. Q1 GDP was flat. If you're a working person in the U.S. right now, you're not thriving. And to me this is a sign that Keynesianism is perhaps played out. We're increasing asset prices, making housing more expensive and increasing inequality, without actually growing the economy.

adventured 11y ago
The 40 to 50 year global experiment in Keynesianism has been a complete disaster. The greater extent a country has put it to work, the bigger the disaster. All it has done, is give governments an excuse to drastically spend beyond their means to fake growth and well being that isn't real. Then they act so shocked when their economies sink into recession the moment the stimulus programs stop. The US, Europe, China, Japan are all drowning in this fraud, with $60-$80 trillion in new debt over the Keynesian reign, and absolutely nothing to show for it but economic strangulation and upset voters.
douglasisshiny 11y ago
Q1 '15 is being considered a blip for many reasons (weather, west coast port strike, the strong dollar [1], big hits in the energy markets and markets affected by energy, etc.). Many economists expect a bounce back, much like last year. 1. Remember when people, counter to what Krugman said, said the dollar was going to experience hyperinflation?

deleted 11y ago

[deleted]

mudil 11y ago
Former Enron adviser Paul Krugman.

anm89 11y ago

Paul Krugman in 2002: "To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Somehow every op-ed this guy writes gets treated as the word of god. It is important to remember that while he does have a Nobel prize, he has also said a lot of profoundly dumb stuff. I am not saying that Austerity is inherently good or inherently bad. The truth, like for everything else, lies in the grey and is situation dependent. Krugman however is absolutely religious about fiscal stimulus and demand side economics, and is going to claim that the solution to EVERY problem is increased government spending. These situations are nuanced and unfortunately what you are hearing from Krugman is something more akin to proselytizing his religous views on the graces of Government spending(a view which no facts or events would every sway him from) opposed to thinking critically about a difficult problem.

mudil 11y ago
Not god. Just former Enron adviser Paul Krugman.
- MaysonL 11y ago
  So what? See: http://www.pkarchive.org/personal/EnronFAQ.html http://www.pkarchive.org/personal/EnronFAQ.html
Amezarak 11y ago
Let's see what Krugman says about this: > One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece. > Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened. http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/comment-page-5/?_r=0 http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the... Aside from that, Krugman does not, in fact, prescribe increasing the government's share of economic growth in all circumstances, so you're wrong anyway.

trhway 11y ago

the main problem with "austerity" isn't the theoretical question of the spending levels, it is the political&social issue that practical "austerity" means that during bad times poor people must pay for the well connected and rich people's exuberance of the good times. "Sorry, we have to reduce your pensions and salaries to pay back the loans we spent on our luxury BMWs."

jhulla 11y ago

What Krugman and his ilk fail to address is capital misallocation. Placing capital into its most productive use is the definition of a well functioning market. We tolerate market distortion for greater social good: safety regulations, environmental regulation, labor laws, etc. Unfortunately, with QE1,2,twist,3 and ZIRP, we are now well past properly functioning capital markets. At a gross scale, every single investment in the world now is actually a bet on central bankers keeping interest rates suppressed, liquidity flowing, and money printers running. The trillions of dollars of distortion that capital markets have experienced since 2008 has fundamentally altered the investment landscape. And not for the better. Krugman crowing about austerity is laughable. Of course, government spending is just another form of capital distortion. Sure, try some more. It'll be another drop in the bucket. It will not move the needle in a sustainable fashion. Global demand is being vacuumed up by economies through competitive currency devaluation. Deficit spending (Krugman's argument) generates new demand in the hopes of creating jobs and nurturing the economy. Unfortunately, since 2008, our global financial system is so radically distorted that a burst of demand isn't about to lift anybody out of long-term economic doldrums. At the root of the problem is massive capital misallocation that has been baked in the cake. Global supply is so large due to QE and ZIRP that economies worldwide cannot support their investments. Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. Krugman doesn't get it.

Amezarak 11y ago
> Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. So while Krugman offers data and concrete, falsifiable predictions that generally prove correct - for example, that hyperinflation will not be a problem, that QE won't move the economic needle much (but is better than nothing), that interest rates will remain low for the foreseeable future despite claims to the contrary, you offer vague handwaving about capital misallocation and "distortions" and then tell us you can't answer how and when Krugman will actually be wrong. Can you understand why people have difficulty coming to terms with your beliefs? To me it just seems rooted in some cognitive bias about suffering and sacrifice; it sounds like you just can't believe things are this easy, that we have to suffer and be punished for our vile profligacy.

mudil 11y ago

The big Keynesian idea is that somehow gov't can allocate capital better than private businesses. But that patently cannot be true. (I never could understand how Keynesian economics is different from socialism.)

Mikeb85 11y ago
Not true whatsoever. Here's the definition as stated by Wikipedia, which I find to be pretty accurate and concise: > Keynesian economics is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). This contrasts with the earlier theory that production creates demand. And while Keynesian economics does suggest that the government should intervene in the economy, it's far from a command economy.

bitL 11y ago

The problem with austerity as I see it is that it is a losing strategy if any other player doesn't adhere to it. Example - Economy A starts QE, Economy B sticks to austerity. Economy A gets super cheap money they have to invest somewhere, Economy B is short on money due to austerity. Economy A with the money out of thin air buys most of the industrial assets of Economy B. Economy B wants to change the course by rejecting austerity and starting QE. But the first mover advantage is gone, Economy A's stocks are already inflated so Economy B can't gain anything by trying to do the same as Economy A, buying Economy A's industrial assets, causing downfall of its trading currency.

pbreit 11y ago

Pretty much every government could benefit immensely from austerity. The problem is, of course, that government is lousy at execution and overly political and self-preservation all and so, for example, cuts the most visible programs first. Yes, I understand the notion of spending your way out of a recession.

seertaak 11y ago

The Paul Krugman delusion: thinking a little or a lot more of the policies that have produced little to no improvement will suddenly work if we do it just one more time.

mdemare 11y ago
Actually, The Paul Krugman delusion is the illusion that people have that they have much more insight in economics and economic policy than Paul Krugman, despite never having studied economics, or read a textbook or a journal in economics.
- quadrangle 11y ago
  That's really just an instance of the Dunning-Kruger effect, but it's a good example of it.
- brucefancher 11y ago
  Paul Krugman is not correct or incorrect to the extent that he has studied economics and economic policy. He's correct or incorrect to the extent that he can back up his views with evidence, which he generally can't.

thoward 11y ago

Krugman presents this as a dilemma between two choices. 1. Institute austerity now. 2. Institute stimulus now, pay down debt responsibly once the good times roll. This is a sham dilemma. The real options appear to be. 1. Institute austerity now. 2. Institute stimulus now, but half-ass the debt paydown in the future, condemning future generations to a high debt to GDP ratio. Given this real dilemma, which is worse? I don't pretend to know the answer. I know austerity sucks. I also know that governments lack the self discipline to pay down debt significantly in the future. Which option is actually worse?

Amezarak 11y ago
> Given this real dilemma, which is worse? I don't pretend to know the answer. I know austerity sucks. I also know that governments lack the self discipline to pay down debt significantly in the future. What real-world problems do high debt/GDP ratios cause? Isn't the whole point of stimulus to kick-start the denominator in the debt/GDP equation? At any rate, governments don't need to "pay down debt" (which is kind of a strange thing to say, since the government is always paying off bonds.) They just need to grow the economy such that the debt is less substantial, which pretty much everyone has always done. I mean, the US wasn't going through times of tribulation paying off its 100%+/GDP debt after WWII, we just inflated it away.
- thoward 11y ago
  Here's an interesting meta-study about the effects of a high debt to gdp ratio. http://www.nber.org/papers/w16827 http://www.nber.org/papers/w16827 I admire the candor of your second point ("we just inflated it away.") I think this is ultimately what will happen here in the USA. I think that most people would choose austerity now over higher inflation down the road, but maybe I'm delusional. Our consumer savings rates continue to trend down so maybe people just wouldn't care much. http://www.tradingeconomics.com/united-states/personal-savings http://www.tradingeconomics.com/united-states/personal-savin...
  - Amezarak 11y ago
    > Here's an interesting meta-study about the effects of a high debt to gdp ratio. I know you're sincere, but I kind of had to laugh. Reinhart and Rogoff have been through the ringer for publishing that paper, which is almost entirely bunk. There was a huge storm that made it even to the mainstream media about how truly flawed that paper was (with errors getting as basic as "they can't use Excel.") It's even mentioned in the OP. To be fair, the claim that slower economic growth is correlated with high debt is somewhat true. But most argue causation is in the other direction: slow growth causes high debt. > I admire the candor of your second point ("we just inflated it away.") You might recall that the time period in which we inflated that debt away was one of the most prosperous for all Americans. Meanwhile, austerity will directly lead to people losing their jobs and an economic slowdown that will prolong the suffering people are already going through...for what?